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An Inpatient Prospective Payment System Overview: Diagnosis Related Groups

Transfer Policies

Hospitals will receive adjusted reimbursement if Medicare patients are transferred to another acute care facility or to a post-acute care facility. The transfer policies were put into effect to prevent inappropriate early transfers. For patients transferring from one acute care facility to another, the hospital that transfers the patient is paid a DRG-based per-diem rate. The receiving facility receives the full DRG payment.

The post-acute care transfer policy pertains to discharges from an acute care setting to a skilled nursing facility (SNF), home health agency (HHA) or PPS-exempt facility. This policy also adjusts the acute care or trans- ferring hospital's reimbursement to a DRG-based per-diem rate. This payment reflects the reduced lengths of stay arising from the transfer. As of Oct. 1, 2006, 182 DRGs are subject to the post-acute transfer policy. An example of a DRG that meets the post-acute care transfer criteria is DRG 498 Spinal Fusion of Cervical Spine without CC.

Medicare Code Edits (MCE)

Medicare uses MCE in the processing of IPPS claims. The MCE is used to validate ICD-9-CM codes, to identify coding inconsistencies, and to detect incorrect billing data. To determine an appropriate DRG, the patient's age, sex, discharge status, principal diagnosis, secondary diagnoses and procedures performed must be reported accurately. The MCE are used by CMS to make sure the Medicare DRG and resulting payment is valid and accurate.

The following 17 MCE edits are used to detect potential problems.

1 Invalid diagnosis or procedure code

2 E code as principal diagnosis

3 Duplicate of principal diagnosis

4 Age conflict

5 Sex conflict

6 Manifestation code as principal diagnosis

7 Nonspecific principal diagnosis

8 Questionable admission

9 Unacceptable principal diagnosis

10 Nonspecific OR procedure

11 Noncovered OR procedure

12 Open biopsy check

13 Bilateral procedure

14 Invalid age

15 Invalid sex

16 Invalid discharge status

17 Limited coverage


CMS uses DRG grouping, pricing and editing software to run claims through the MCE and to calculate the DRG assignment and subsequent reimbursement for every Medicare claim. The majority of acute care hospitals also use these programs to assure that they are submitting claims properly and are receiving the appropriate reimbursement.

As mentioned previously, the IPPS DRG system is updated annually on Oct. 1 to accommodate the yearly ICD-9-CM changes, as well as changes in clinical practice and resource use. Effective Oct. 1, 2005, CMS is using Version 23, which includes 526 DRGs. There will be no DRG update in April 2006 because there will be no changes.

In addition to determining the reimbursement a hospital is to receive for acute care Medicare cases, DRGs are also used to evaluate the quality of care and assist in evaluating the utilization of services provided by a hospital. Benchmarking and outcomes analysis are often performed to assess physician documentation and coding practices.

The ICD-9-CM Official Guidelines for Coding and Reporting should be reviewed for proper assignment and sequencing of principal and secondary diagnoses codes used to calculate Medicare DRG assignment. The CMS Web site also has additional resources on the IPPS at /AcuteInpatientPPS/. Take the following quiz to test your understanding of the IPPS DRG information contained in this article

An Inpatient Prospective Payment System Overview: Diagnosis Related Groups

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